Type:
Solution Manual
Resource:
Strategic Business Tax Planning
Edition:
2nd Edition
Author(s):
John E. Karayan Charles W. Swenson
STRATEGIC BUSINESS TAX PLANNING Chapter 1 Problems & Cases
Copyright © John Karayan & Charles Swenson, 2006 All Rights Reserved. No part of this publication may be reproduced, stored in any retrieval system, or transmitted, in any form or any means, electronic, mechanical, photocopying, printing, recording, or otherwise, without the prior express written permission of the publisher. Printed in the United States.
CONCEPT APPLICATIONS 1.
You are the Chief Executive Officer of a New Orleans-based company which grosses $30 million a year. Entirely through a Web site, the company sells exotic breakfast cereals which are imported from the Cayman Islands, the Netherlands Antilles, and the Cook Islands, where the grains are indigenous. On your way to work, you hear that the U.S. Congress is considering passing legislation imposing a 3% excise tax on companies which trade with tax havens. How could you most efficiently find out whether the law would affect your company?
2.
As an executive for a major telecommunications firm, you are looking at a choice between two capital investments over the next five years. The first is developing new hardware and software for TV Internet access. Although the payoffs are unknown, this option is made more attractive by a 20% U.S. income tax credit. The second option is simply replacing your existing equipment at major telecommunication centers across the United States. How should you factor taxes into weighing these alternatives?
3.
One of the software companies you have invested in just issued the following press release: “We are delighted to announce that we have begun negotiations with our closest competitor on a possible merger, which would be tax free under United States Code Section 368. Because the discussions have just started, we can give no other information at this time.”
What sources would be best for helping you find out whether this would be good for you? 4.
Your best friend’s parents, who retired after selling their business for $5 million last year, so enjoyed their subsequent vacations to Vancouver, British Columbia; Santiago, Chile; and Paris, Texas that they have decided to relocate to one of them. Because your best friend is their only child, and the sole beneficiary under their will, would her parent’s decision on where to move affect her inheritance?
5.
Your sister is thinking about starting a Web-based business selling specialty teas to upper middle class American women who are working outside the home for compensation. If the business is to start up in three months, what key decisions will your sister face during that period, and how might taxes impact them?
6.
You work for a family-owned business located in Coos Bay, Oregon, which manufactures prefabricated metal structures. The owner’s granddaughter has just started college at McGill University in Quebec, and he has promised to pay half of her costs provided she majors in engineering and works for the business after she graduates. Over lunch, he asks you to find out whether he should pay his half from his personal accounts or put her on the payroll. What taxes should be considered in making this decision?
2
PROBLEMS 1.
Refer to CONCEPT APPLICATION question 1. What are the pros and cons of looking into the issues with a Web search rather than contacting a tax professional?
2.
Refer to CONCEPT APPLICATION question 4. How would your analysis change were you to find out that that although the parents are both in good health, they are 90years old? What if one were terminally ill?
3.
Refer to CONCEPT APPLICATION question 5. How would your answer change if your sister is willing to move anywhere in the world?
4.
Refer to CONCEPT APPLICATION question 6. How would your answer change if the business were located in Australia? France?
3
MINICASE 1: PET PUBLICATIONS, INC. “Dog Delight must go” declared Mary Gold, Chief Executive Officer (and majority shareholder) of publicly traded PET Publications, Inc., at the quarterly Board of Directors meeting last night. PPI is the industry-leading publisher of electronic magazines for pet owners, and you were at the meeting to brief the Board members on sales trends. “Our shareholders expect a 20% return on sales. All of our titles – Bird World, Feline Fancy, and Reptile World – clear the 20% hurdle. But Dog Delight only makes 10%. Sure, it generates $2 million in net operating losses per year, which partly offsets the $20 millions of taxable income from the rest of the organization. I think we should sell it to Animal Publications.” Animal Publications is your major rival, comparable in sales and assets ($30 million and $150 million, respectively) but consisting of 20 smaller publications which did not have the brand recognition of PPI’s four publications. Data on public 10K reports indicates that the rival was paying taxes at a 34% rate. As sales manager, you pointed out to the Board that they should consider that: ▪
Feline Fancy was the “flagship” publication with a circulation double any of the other three magazines.
▪
Advertising revenues have declined significantly over the last three years.
▪
If the magazine is sold, it will sell for about a $20 million profit.
If you are asked to prepare a report to the Board on this subject, what tax issues would you need to discuss in it?
4